One thing to search for in the markets, is what entities are being unrealistic.? We have a bevy of them now:

• Eurozone — “We can get many nations to behave like Germans.”
• China — “Our financial system is in great shape.? We are ready to open up our economy to global capital flows.”
• US — “Eventually the government budget will be balanced, really!”

In the present environment, creditors are the unrealistic dreamers.? They imagine that they will be paid back at par, when they made loans that were less than creditworthy.

In most cases, the right solution is to offer no more loans, and compromise on existing loans.? The wrong solution is to extend more credit, hoping that the situation will turn, and that you will eventually be paid back at par.? The result of extending more credit is that you will take much bigger losses later.? Tough love produces better results than compassion, for all parties.

Yes, there may be more short-run pain, but there will be better recoveries after the crisis is over.? Think of Eastern Europe — those that took the “Big Bang” did better.? In this environment, creditors need to take their losses sooner, and the system will do better thereafter.? To seek full payment is unrealistic.